Our website uses cookies to improve your user experience. If you continue browsing, we assume that you consent to our use of cookies. More information can be found in our Cookies Policy and Privacy Policy.

Is there value left in Europe and, if so, where?

29th June 20175:26 pm

By Marcus Morris-Eyton

Having been out of favour for a number of years, European equities are finally seeing the return of investors. However, with Europe having outperformed the S&P 500 by 6.3 per cent in US dollar terms for the year to date (as of 13/06/2017), how much outperformance potential is left?

To answer this question one needs to understand the depth of the underperformance over the past decade; with MSCI Europe having underperformed the S&P 500 by around 80 per cent in US dollar terms since June 2007. Europe, due to a combination of the market structure and the austerity agenda, has lagged the US in terms of its economic recovery, and remains arguably 18-24 months behind the US in the cycle, as highlighted by the divergence in recent data. This is evident in the delta between both regions’ profit margins, earnings and ultimately valuation multiples, where European corporates trade significantly below US peers.

In recent years, European politics and the well-documented rise of populism have understandably deterred many international investors, leaving the region under-owned globally. We have always argued that the impact of domestic politics on underlying corporates is often overstated by investors, particularly when investing in companies with secure business models and strong pricing power. However, the magnitude of inflows Europe has seen since the election of Emmanuel Macron in France has reinforced that, while politics rarely alters the course of Europe’s best-positioned companies, it clearly influences global investor sentiment. It is, therefore, welcome to see political risk subsiding, but we urge investors to remain cognisant of the Italian political situation.

Of far greater importance to bottom-up investors is the cyclical recovery that Europe is currently seeing. In Europe, we have just come through the best quarterly earnings results season for seven years, with 11 out of 12 sectors beating consensus expectations. Significantly, unlike in previous quarters, these wins were broad based, with revenue also surprising on the upside, rather than companies simply cost cutting. For the first time since 2011, we are now seeing more European companies’ earnings expectations upgraded than downgraded, with the earnings revision ratio standing at 1.18. This provides encouragement, but also raises the bar from which companies must now over-deliver, particularly as certain base effects wane.

To read the complete story and find out if there really is value left in Europe, please click here.

Recommended

Wingate Financial Planning and Navigator Financial Planning were among the top advice firms to take home prizes at last night’s Money Marketing Awards. Leading lights of the profession gathered in London last night for the glamarous ceremony hosted by comedian Marcus Brigstocke. The Money Marketing Awards recognise those who had reached the top of their […]

Clients of St James’s Place have attacked the firm over what they say is an opaque charging structure and punitive levels of exit fees. The Sunday Times was asked to examine what retired solicitor Arnold Rosen had been charged by SJP between 2009 and 2015 after Rosen could not work out the level of charges […]

Written by Mike Riddell29 June 2016 Headlines over the past few days have screamed about record falls in sterling, record low bond yields and massive falls in equity prices. However, if you take a slightly longer view of markets rather than simply the one- or two-day reaction, I think it’s amazing how little markets have […]

Newsletter

Latest from Money Marketing

You have to do hard things to be successful in life. The things no one else does. Why? Life coaches will tell you those are the things that define you; the things that make the difference between existing and living. This may well be true but if that does not float your boat, then American […]

Only a quarter of women are shopping around for their retirement income, according to national IFA LEBC. Customers of LEBC pension advice business The Retirement Adviser are far more likely to use its whole of market service to find the best retirement income solution if they are male. LEBC says the proportion of women using […]

A weekly account of the curious goings-on in the world of financial services A game of Brexit MonopolyLast week, in a foreign policy speech, Theresa May said Brexit negotiations were in their “endgame”. WSJ thinks this is highly unlikely, having heard that not even a quarter of European law has been rolled over yet. Wingate […]